Questor: Ride the AI wave with this hidden gem from the FTSE 100

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A businessman using a mobile phone to check stock market data
A businessman using a mobile phone to check stock market data

Relx is probably the biggest UK-listed company you have never heard of. Its market capitalisation of £67bn makes it the sixth-largest FTSE 100 stock behind AstraZeneca, Shell, Unilever, HSBC, and GSK. Yet the company, formerly called Reed Elsevier until a name change in 2015, receives far less attention than many of its smaller FTSE 100 index peers.

In Questor’s view, this is extremely surprising. The firm’s past performance and future growth potential mean it should be firmly on the radar of long-term investors.

Since first being tipped by this column all the way back in February 2018, the company’s shares have surged 138pc higher and outperformed the FTSE 100 index by 129 percentage points. And with operating profits having risen by 13pc to 15pc per annum in each of the past three years to produce a total rise of 47pc during the period, its track record is highly impressive.

The company’s ongoing shift away from print publishing has been key to its strong performance. It now overwhelmingly focuses on providing tools that use algorithms and, increasingly, artificial intelligence (AI) to analyse vast amounts of data in order to enable improved decision-making across a wide range of industries.

For example, its tools are used by insurers to assess the likelihood of a claim, by healthcare professionals to select the best patient treatment option and within the retail sector to determine whether specific transactions are genuine.

Given the seemingly insatiable appetite of investors for any company that is even remotely linked to AI, it is perhaps unsurprising that Relx’s share price has surged higher over recent years. This has naturally prompted a rather rich rating, with it currently trading on a price-to-earnings ratio of 31.6. Although this is relatively high and suggests there is limited scope for an upward re-rating, the company’s strong market position indicates that it continues to offer long-term investment potential.

Over the past three years, for instance, its return on equity has averaged just over 50pc. This suggests that it has a clear competitive advantage over sector peers that could realistically be sustained over the coming years. And with the firm forecast to post 8pc annualised earnings growth over the next two years despite the presence of an uncertain global economic environment, its relatively reliable and upbeat financial prospects remain highly attractive.

Moreover, its exposure to a diverse range of industries means it offers less risk than many other FTSE 100 index members.

Recently released half-year results showed the company’s revenue rose by 7pc, while earnings were up 10pc as a result of improved profit margins. Indeed, the firm’s operating profit margin increased by 110 basis points to 34.1pc as it was able to limit cost increases. Rising profit margins have proved to be a constant theme over recent years, increasing by 390 basis points at the operating level over the past three financial years alone.

The company’s financial position also remains sound, with net interest costs covered almost 12 times by operating profits in the first half of the current year. While it engaged in relatively modest activity in mergers and acquisitions during the six-month period, spending just £61m in total on two acquisitions, the firm’s solid balance sheet provides scope to boost its organic growth rate over the coming years.

The company’s half-year results confirmed the final £250m of its £1bn share buyback programme is on track to be completed before the end of the year. While some investors may naturally question the merits of a share buyback programme while the company’s market valuation is relatively high, Questor believes the stock has further room to run.

Despite its shift away from print publishing, the segment still accounts for around 5pc of the firm’s sales. An ongoing decline in the wider print sector means it continues to weigh on the company’s overall performance. Over time, this effect is likely to dissipate as the firm’s shift towards higher-growth sectors continues. This should provide a gradual boost to the company’s growth rate.

When combined with a solid competitive and financial position, as well as growth opportunities provided by AI amid an improving long-term global economic outlook, the stock remains a worthwhile purchase. Its solid track record of performance and diverse range of operations equate to reduced risk that mean its overall risk/reward opportunity is highly favourable.

Questor says: buy

Ticker: REL

Share price: £36.01


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